The saying, â€œsaving for a rainy day,â€ is probably something youâ€™ve heard thrown around by your parents, grandparents, and even money-conscious friends. The idea is to have money stored away, just in case.
However, saving for an event thatâ€™s not even happened yet can be difficult, as most of us donâ€™t like to think about the â€œwhat ifsâ€ and definitely donâ€™t like to contemplate worst-case scenarios.
Nevertheless, having an emergency fund in place is incredibly important when youâ€™re trying to make sure you and your family are financially secure. A lot of experts recommend having around three to six monthsâ€™ worth of your living expenses stashed away.
Why Should You Have an Emergency Fund?
It doesnâ€™t matter how well things are going in your life or how much money youâ€™re earning, because, unfortunately, bad things do sometimes happen.
For example, you might find your boiler breaks down and floods your kitchen, your vehicle might break down and rack up a $1,000 bill, or a family member might get into trouble and need help from someone like specialized DUI and DWI lawyer, Gerald Miller.
Whatever happens, all of these things cost money, and they arenâ€™t accounted for in your monthly budget. Therefore, your emergency fund covers eventualities like the above, allowing you to easily access the funds you need to get yourself out of a sticky situation.
It may sound straightforward but a recent survey found that, in America, 64% of adults wouldnâ€™t have enough cash to deal with an emergency that costs $1,000. To get by, 17% said theyâ€™d neglect their existing responsibilities, 17% would borrow from a friend or family member, 12% said theyâ€™d sell or pawn their belongings, and 9% said theyâ€™d use a cash advance store to get a loan.
By doing this, theyâ€™re not just putting themselves under even more stress but they could also be placing themselves further and further into debt. Theyâ€™ll continue to live by each paycheck, having little or no savings on standby ready for the so-called â€œrainy day.â€
Living like this means youâ€™re constantly teetering on the edge of financial disaster. One month without any earnings due to job loss or illness could devastate a family if they donâ€™t have enough funds to cover the basics.
How Much Money Should You Set Aside?
Even though experts recommend three to six monthsâ€™ worth of your living expenses, this can be difficult to achieve. And, when you feel as though youâ€™re not saving enough it can discourage you from the entire process of saving.
Therefore, saving as much as you can is better than nothing. So, start by setting yourself small, achievable goals, before increasing this over time. Youâ€™ll probably be surprised how little you notice this extra money going out of your account, which will allow you to keep increasing it until youâ€™re saving larger amounts on a regular basis. And the comfort of knowing youâ€™ve got this cash ready and waiting will provide you with a huge sense of relief.
What Kind of Account Should You Put Your Emergency Fund in?
Even though you need to have good access to this money, itâ€™s a good idea to set up a separate account so youâ€™re not tempted to spend it on luxury items.
Try to put the money in an account thatâ€™s tied to your normal account, but isnâ€™t within your current account or savings. An online savings account will be ideal. Because, even though you might have to wait two or three days to transfer the money from one account to another, it will reduce the chances of you spending these funds on something that isnâ€™t classed as an emergency.
Not having an emergency fund in place is often why people end up in debt because the only way they can come up with the money is to borrow it from somewhere else. This can create huge problems because it adds interest to the initial payment you have to make in an emergency, creating a deeper financial hole that youâ€™ll struggle to climb out of.
Youâ€™ll need to get a loan or put things on your credit card, which means you donâ€™t just have to pay the bill but you also need to pay the interest thatâ€™s been charged on this credit card.
Start preparing for all eventualities by putting money aside for those inevitable rainy days. It might seem like a tall order to start with but once you get into the habit of doing it, you might just surprise yourself.
Mason Hamilton shares his personal finance tips around the internet with his insightful articles which he hopes will help people get wise when it comes to money matters.